By Thomas D. Jensen, Esq.

Coverage lawyers tend to think in terms of “occurrence”, “bodily injury”, “property damage”, “all sums”, “allocation by time on the risk” and other constantly litigated terms.  That is the focus of commercial general liability (“CGL”) insurance that was created to protect policyholders from bodily injury or property damage claims asserted by third parties.  But occupying some space there in the declaratory judgment corner is another type of coverage that has little to do with CGL-style litigation.  It is professional liability coverage, errors and omissions coverage, “D&O” coverage, and similar descriptors that insures a different risk.  It insures professionals for errors or omissions in judgment that cause loss.   We explore here a description of the coverage, common exclusions, and survey the litigation landscape when coverage is denied in professional policyholder contexts.

Scope of Professional Liability Coverage

Over the last few decades, the specialized training required in myriad professions has led to a booming industry for insurance products that extend coverage for errors and omissions unique to particular professions.  Coverage is available not only for attorneys, medical professionals, architects, engineers, and surveyors, accountants, real estate agents, and insurance agents, but also for entertainment professionals, movie production participants, internet service providers, website designers, recording artists, graphic designers, interior designers, landscapers, and multimedia companies.  4 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition, Ch. 25 Abstract (2010).  If a loss is caused by a professional’s error or omission in rendering professional services, the professional liability policy will step forward to defend and indemnify the professional if the claim is not excluded from coverage.

E&O policies usually provide coverage for liability resulting from covered acts, errors or omissions in the performance of “professional services.”  Thus they are unlike typical CGL policies that provide coverage for “bodily injury” or “property damage” and typically exclude coverage for professional liabilities.  Thomas §25.01[1]; 3 Rowland H. Long, Law of Liability Insurance, §12.04 (2004).  Unlike CGL “occurrence”-type policies that provide coverage for bodily injury occurring during the policy period regardless of when the claim is reported, most professional liability policies are sold on a “claims made” basis in which the insured receives coverage for claims that are made and reported during the policy period.  The insurer has no future obligation under the policy if a claim is not reported during the policy period.  (Many carriers sell an “extended reporting endorsement” that allows a policyholder to report a claim for a short while after policy period expiration, particularly when the policy is cancelled or non-renewed.  Thomas §25.03[10].)  The underwriting benefit involved in claims made products is that for the most part the carrier’s risk terminates when the policy expires.  “Long tail” exposures generally are not a risk underwritten by the claims made insurer.

Thus, in the absence of a retroactive date, a claims-made policy will provide coverage for a claim made during the policy period regardless of the date the act or omission giving rise to the claim took place.  See, e.g., Ehrgood v. Coregis Insurance Co., 59 F. Supp. 2d 438, 447, n. 8 (M.D. Pa. 1998) (noting that in the absence of a retroactive date the claims made policy provides prior acts coverage without limitation).  To limit the extent of their exposure, claims made insurers often will impose a retroactive date in the policy that limits covered claims to those occurring only after a certain prior date.  Thomas A. Marrinson, Professional Liability Insurance, §1.02[1][c] (2010). 

Professional liability polices require that the insured be performing or delivering “professional services” at the time that the actionable conduct arose in order for coverage to apply.  Obviously what constitutes “professional services” varies from occupation to occupation.  As a general rule, however, professional services are distinguished from the insured’s activities in managing the business aspects of his or her professional office.  Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d, §131:1 (2005). 

In addition to the typical types of professions needing professional liability coverage is similar coverage for corporate directors and officers.  In the case of this variant of professional liability insurance, the coverage is commonly referred to as “directors and officers” or “D&O” coverage and is, again, essentially the same type of protection as is afforded under “malpractice” or “E&O” coverage.  Russ & Segalla §131:1. More recently, the E&O insurance market is providing coverage for computer services providers.  The coverage is designed to protect such professionals from the risk of failure of software, or failure of the computer system more broadly, to meet the customer’s expectations.  Lorelie S. Masters, Insurance Coverage Litigation §18.04[b] (2010).   

The Coverage Grant: Professional Services

The typical professional liability policy protects the practitioner against claims for loss arising out of either “malpractice” or “malpractice, error or mistake” due to the “rendering, or failure to render, professional services.”  The determination of whether coverage is afforded generally turns upon the construction of these terms and their application to the particular facts presented.  State licensing statutes – which often define the healthcare professionals’ scope of practice – should be consulted in evaluating whether the acts constitute professional services.  Russ & Segalla §131:8.

Generally medical malpractice policies provide coverage for a “medical incident” which defines the professional service covered.  Thomas §25.07[3][c].  Absent a medical incident coverage cannot exist.  See, e.g., Snyder v. Major, 818 F. Supp. 68 (S.D.N.Y. 1993) (finding that sexual abuse does not involve a medical incident); Hampton Medical Group v. Princeton Insurance Co., 840 A.2d 915, 921-25 (N.J. App. Div. 2004) (finding that fraudulent billing did not involve a medical incident).  Identifying medical incidents may also impact the number of policies applicable to a loss.  For example, when an obstetrician’s care of a patient early in a pregnancy (during one policy period) carries over to a second policy period (when the baby is delivered), one court has held that both policies were triggered.  See Continental Casualty Co. v. Hartford Fire Insurance Co., 116 F.3d 932 (D.D.C. 1997) (finding that early medical decisions affected delivery decisions that led to the loss).  Malpractice policies not only provide coverage for the errors and omissions of the health professional, but typically they also cover the health professional’s employees or assistants.  Russ & Segalla §131:5.  However, some policies expressly limit coverage to those employees or assistants acting under the insured’s instructions in the care and treatment of a patient personally attended by the insured.  Russ & Segalla §131:6.  The coverage of a medical malpractice policy also typically encompasses injuries arising out of the use of office equipment used in the care and treatment of the patient.  Russ & Segalla §131:9.

Attorneys’ malpractice insurance generally provides coverage for liability “arising out of any act, error, or omission” of the insured in rendering or failing to render “professional services for others” in the insured’s capacity as a lawyer.  Russ & Segalla §131:20.  Accountant professional liability claims typically provide coverage for claims arising from the insured’s rendition of “professional accounting services.”  Marrinson §7.06[2].  Construction design claims can pose special difficulties in evaluating the professional/non-professional issue.  For example, is a professional service involved when loss occurs at a project at which the architect or engineer is supervising construction?  Courts look to see if the loss followed from the design professional’s skill, training and judgment.  Marrinson §7.03[2].